Today’s Headlines: China and the U.S. Reach Climate Change Agreement

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On November 12 at the Asia Pacific Economic Cooperation summit (APEC), President Obama and Chinese President Xi Jinping announced a controversial agreement to reduce carbon emissions in an attempt to address climate change. President Obama characterized the agreement as “historic”, while Sen. James Inhofe (R-Okla.) referred to it as a “nonbinding charade”.

Which assessment is correct? Most likely, the truth is between those two extremes. It is historic in a sense, in that China has never before agreed to cap carbon emissions. The agreement is indeed nonbinding, and one has good reason to be skeptical about China’s intent – and ability – to meet their goals.

For the sake of discussion, let’s assume that both parties have the intention to follow through on their commitments and take a closer look.

Landmark Agreement or Empty Promise?

President Obama pledged to reduce greenhouse gas emissions by 2025, with a target of 26-28% below the levels of the 2005 baseline. According to a White House fact sheet, this accelerates the reduction from a 1.2% yearly average from 2005-2020 to a 2.3-2.8% annual reduction from 2020-2025 to hit the 2025 target.

This lines up with the 80% emissions reduction by 2050 that President Obama proposed in a 2009 United Nations accord. While critics howl, they should consider that in essence, the President promised to do what he has already promised to do in other venues.

Meanwhile, what exactly did China promise to do? They have promised to change over to 20% renewable energy by 2030, and to cap emissions at that point.

For reference, Chinese zero-emission energy sources were less than 9% in 2011. Hitting a 20% target will likely take a concerted effort with nuclear power and breakthroughs in solar power – but China is already well versed in relatively economic production of solar panels, and the goal is not unreachable.

The bigger concern is that the peak amount of emissions was not listed, and China has already surpassed the U.S. in emissions with a solid upward trajectory.

The U.S. peaked at around 6 billion metric tons of carbon emissions in the last decade and has been slowly decreasing since then. China is well above 8 billion metric tons and current studies estimate a range of 10-11 billion tons per year between 2025 and 2030 – which in itself would be a decrease from the current trajectory.

In essence, the U.S. has given up nothing over its existing plans, and the Chinese have made a non-binding promise to cap emissions 16 years in the future without committing to an actual target value.

If you are an optimist, you consider that this may be an empty promise but a potentially empty agreement is progress compared to no agreement at all.

Domestic Politics Still a Major Hurdle

Republicans have long pointed out that unilateral restrictions on carbon are pointless, and that China’s participation is necessary to make any real progress on the environment. Democrats are using this agreement to squelch Republican objections.

Sen. Barbara Boxer (D-Cal.), the current (and soon-to-be former) Chair of the Senate Environment and Public Works committee, stated, “There is no longer an excuse for Congress to block action on climate change.” Congress is likely to disagree, given that Republicans have taken over the Senate as well as the House, and Boxer’s replacement is likely to be Sen. Inhofe, a strident climate change denier who wrote a book about the subject titled The Greatest Hoax.

Given the politics, almost all steps taken toward the U.S. goal over the next few years is likely to be achieved through executive action, and Congress can partially thwart those steps through legislation or de-funding efforts.

The Takeaway

Both China and the U.S. have reason to follow through on their plans. Regardless of your stand on climate change, technological advancements are likely to make alternative fuels more economical eventually – and any serious effort to meet these goals from either side is probably going to mean a revival of the nuclear industry, which many climate change activists are not yet ready to embrace.

Meanwhile, the air quality in China is increasingly polluted and reaching truly dangerous levels. The Chinese government does have reasonable incentive to clean the air – and the potential to do it without great harm to their economy with a turn toward nuclear power and continued breakthroughs in their solar power industry.

Politics on the U.S side is going to mire the efforts down, whereas on the Chinese side, the issue will be the government incorporating as much change as they can without sacrificing their economy.

From an investor standpoint, the most likely short-term changes are going to be executive actions that can benefit clean technologies and punish coal. Keep an ear out for any of these actions that are likely to affect your holdings, as well as the Congressional countermeasures that are likely to follow.

The short-term effect on your holdings is probably negligible. In the meantime, we will see if these words are followed up by tangible and measurable actions on either side.